Luke Perry discussed the prospects of tax reform under Donald Trump with Richard Phillips at his office in Washington, DC.

Key Insights

1. Most of the time little happens in regard to tax reform, but this year looks to be different, though it’s difficult to predict what will emerge.

1986 was when the last time major federal tax reform legislation was passed. President Trump has prioritized this issue in his 2017 agenda. DC Republicans and Democrats were expecting a Clinton presidency and planning accordingly. Now policy organizations are catching up with new circumstances. Meanwhile, Trump has not been clear or decisive about what he wants. He actually proposed two different tax plans during the campaign and his nominee for Treasury Secretary stated that taxes for the top 1 percent would not be cut contrary to both of Trump’s proposals.

2. The action will be within the GOP.

A tax reform bill will most likely be passed through budget reconciliation, negating the prospect of a Democratic filibuster in the Senate. Republicans have yet to reach a consensus regarding what this bill should entail. Paul Ryan has wanted to enact tax reform since being a staffer for Jack Kemp. The House GOP has the most developed plan to date, while the Senate has only put forth principles. What to look for next is what President Trump and GOP Senators like and/or want to change in regard to Ryan’s plan.

3. Both parties are interested in taxing offshore holdings by American corporations.

Profits held offshore are currently not taxed until they are brought back into the country. This incentivizes companies to hold profits abroad. There is an estimated total of $2.5 trillion offshore currently. Apple is a prominent example with an estimated $216 billion offshore.

Lawmakers from both parties look at this an opportunity to produce a huge cash infusion. This can be done with a relatively low tax rate on these holdings. President Obama proposed 14 percent, Trump 10 percent, and Ryan 9 percent. This could be how Trump seeks to fund the $1 trillion infrastructure bill he has proposed.

Phillips believes these companies should pay the full 35 percent to stop incentivizing offshore holdings. Moreover, the Institute on Taxation and Economic Policy advocates doing away with many corporate tax breaks because they create economic distortion and encourage perpetual pursuit of special corporate tax breaks. This provides a rare example of agreement across the political spectrum over the benefit of simplifying the corporate tax code.